Hurricane Harvey’s Impact on the Oil Market

Houston and the surrounding area comprise a critical piece of the global oil market in virtually all aspects. The areas impacted by Hurricane Harvey include offshore oil in the Gulf of Mexico, onshore production in the Eagle Ford Shale Basin and a large portion of U.S. refined product capacity.

Other impacts from Harvey include:

Despite the steep decline in crude supply, benchmark U.S. oil prices have shifted lower in recent trading, with the WTI contract for October delivery shedding more than 2.5 percent during Monday’s (8/28) trading. Those losses are the result of a major reduction in crude demand over the near-term as refineries in the area are forced to shut down or run at only partial capacity.

Total refinery outages have been estimated as high as 3 million barrles per day, which would more than double early estimated losses for crude production.

As a result, refined product prices have moved firmly higher as a result of the hurricane, with gasoline prices seeing some of the strongest gains. By late Monday, wholesale RBOB gasoline prices had added 3.4 percent for their prompt contract, with New York Harbor ULSD climbing 1 percent, despite falling crude prices. Looking further down the forward curve, price volatility has been far more limited, with RBOB prices beyond the next two months relatively unchanged.

Overall, crude and product markets face a high degree of uncertainty over the near-term. While the short-term impact is clear (bearish for crude prices, but bullish for refined product prices), the extent to which those factors can have any impact on a longer-term outlook is less certain. Barring major damage to infrastructure, the market should look to rapidly adjust as conditions improve, with the global nature of crude and product markets ultimately helping to absorb the overall price shock.

Expect substantially heightened volatility over the near-term, particularly surrounding inventory reports the next several weeks. Longer-term, the impact is likely to be more restrained, particularly with maintenance season already on the horizon for U.S. refineries.

Overall, the impact of Hurricane Harvey on the natural gas market is expected to be limited as lower Gulf production is offset by weaker power generation demand.

Southeast/Texas/Midcon production dropped to 33.3 billion cubic feet per day (Bcf/d) on Monday, after hovering near 34.5 Bcf/d leading up to the storm. The disruption is expected to be short-term in nature, with production trending back towards recent levels by the end of the week.

Meanwhile, US power burn demand averaged just under 28 Bcf/d over the weekend largely as a result of loss of electricity load in Texas and the Southeast. Demand from the two regions fell roughly 3.7 Bcf/d over the weekend and is expected to remain subdued in the coming days as a result of mild temperatures and continued heavy rain.

In addition, exports to Mexico slumped to 3 Bcf/d from 4 Bcf/d last week as the hurricane impacted pipeline flows as well. Liquid natural gas production has not yet been impacted yet, however.

Key takeaway:

While production has been heavily impacted, the negative impact on demand is likely to translate to an overall bearish near-term price impact, with limited long-term implications. Still, as details and potential outages become more defined, expect heightened volatility through the week ahead.

We recognize that the impact on oil markets pales in comparison to the impact on the people and businesses in the Gulf region. Read this NPR story for suggestions on how you can get involved in the hurricane relief efforts.

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